CURRENCY WATCH
expectations for a possible modest weakening of the Australian dollar in the near term, to within the medium/low end of
the AUD/
USD 0.75-0.70 range on a 1m-3m horizon, when the prospect of two further fed funds rate hikes in the US will also play a role. On the other hand, we stick to our expe ctations for
a
s ubse q ue n t appreciation of the Australian dollar beyond the near term, with a return towards
the
AU D /U S D 0.80
mark
on a one-year horizon, in function of the RBA scenario which contemplates a reacceleration in growth and a rise back of inflation to target.
On this front, the key signal which would pave the way for the prospect of the RBA kicking off its rate hike cycle in the second half of 2018 would be an upward revision of the inflation forecast for 2018. At the moment, inflation is expected to return to target only in the course of 2019. Inflation data for 2Q 2017 will be
will be held on 4 July, but will be overshadowed by the following one, on 1st August, when the new SMP will be presented, containing updated growth and inflation forecasts, both important. The sharp slowdown in GDP growth to 0.3% in 1Q implies downside risks to the RBA’s growth projections for this year: in order to reach the lower end of the target range of 2-3%, an acceleration is required towards average growth of 0.6% per quarter. As regards inflation,
since last August the
released on 26 July, and the RBA essentially expects a stabilisation to 2%, after the climb from 1.5% to 2.1% in 1Q.
The next monetary policy meeting
FX
RBA’s forecast has stayed put at 1½–2½%, i.e. still just below target, for both this year and the next. In theory, this does not rule out another potential rate cut in the coming months, in the event of the economic p ict u r e deteriorating, whereas it leaves the door shut to a rate hike next year. Reuters c o ns e ns us e s ti ma t e s point
to
stable RBA rates on a one- year horizon, although a minority of forecasters do not rule out another cut by
the end of 2017, and an initial hike in the second half of 2018.
The expected evolution of the Australian dollar against the euro should be similar to the trend against the US dollar, i.e. a possible temporary weakening in the near term, followed by a subsequent strengthening, in particular on a one-year horizon and beyond, when the wider rate differential between the RBA and the ECB should turn to the advantage of the AUD again.
FX TRADER MAGAZINE July - September 2017 51
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